Asset Management Letter

4Q 2016 Asset Management Letter

February 10, 2017   ·   By   ·   Comments Off on 4Q 2016 Asset Management Letter   ·   Posted in Asset Management Letter, News, Newsletters

“What a World! What a World!”

We start off the quarterly with the Wicked Witch of the West because sometimes laughter is the best medicine. It is only fitting that we laugh when we think about all the stern pundits and the remarkably poor calls they made last year: Brexit, Trump, Cubs, and four Federal Fund rate increases; to name a few. We bring this up as a reminder about how convincing the consensus can seem at the time and how significantly wrong they can be when the facts are in. Behavioral finance refers to this as “overconfidence” and points to it as a significant detriment to investor returns. This is the moment where we make our tried and true (yet somewhat boring) reference to prudence being the better part of valor when it comes to investing.

On that note, for the past few years the groundswell for “all index funds, all the time” has become a sight to behold. The movement borders on religious zealotry as if everything spoken from John Bogle’s mouth (Vanguard founder) about low cost index funds and investing in general is the gospel.   While we applaud cheap funds and have always used institutional, low expense funds with this in mind, we also caution that absolute certainty in investing is often similar to punditry in the media and can lead to false prophets (or profits, pun intended). We instead believe there are more instances of shades of gray, than black and white, when it comes to the investing world and note that Vanguard recently had an article entitled “Why we believe in active and passive—No ifs or buts” to support this point. To further refine our position, we have and always will encourage the use of index funds (passive investing) when asset classes are cheap, but rely more on active mutual funds when asset classes are fairly priced or a sector is historically inefficient (think niche areas like small cap, emerging markets, high yield, etc…).

For instance, we added energy to accounts via exchange-traded funds (a marketable security that trades like a stock but tracks an index) in 2015 and were rewarded significantly in 2016 with the sector being up 27.89%. Our addition to financial exchange-traded funds (aka ETF’s) in 2016 has also rewarded by being up 20.63% for the year. Of course, our addition to Biotech via ETF’s has not rewarded yet, but once again it is our belief that the time to buy an index or ETF is when the asset class is cheap, not when it is at an all-time high. That being said, Biotech was up 7.44% YTD through January 11th so maybe it is starting to turn.

On the active side, we were pleased with our fixed income fund performance. From the July 5th low with the 10 year Treasury Note at 1.37%, the iShares Barclays Aggregate Bond Index was down 3.03% through December 31st, whereas our actively managed bond funds were up 4.32% (JP Morgan Strategic Income Opportunities), 2.47% (Blackrock Strategic Income), 1.09% (John Hancock Strategic Income), 2.16% (Loomis Sayles), 2.11% (Fidelity Strategic Income), and 4.27% (Pimco Income).  We did have one fund, Doubleline Total Return, however, that was down over that period but it was only down 1.61%. Since it is a five star rated top quartile performer within its category over the three and five year time frame, we are not inclined to give up on Jeffrey Gundlach, the renowned manager of the fund. Keeping with the active theme, municipal bonds have sold off significantly since the election as the market has reacted to the talk of lowering income tax rates, thereby making municipal bonds prospective tax-free yields less attractive. We have seen these types of behaviors before in the municipal market and have typically been rewarded by snapping up attractively priced individual municipal bonds during these temporary market dislocations. Therefore, you may see us reduce positions in bond funds like Doubleline Total Return as we see individual opportunities in the municipal market. On that note, we are starting to hear market pundits talk about bargains in the municipal market so the pricing inefficiency may not last for much longer, but rest assured we are working on opportunities in the municipal arena.

On the equity side, we were also very pleased with many of our active managers versus the index this year as well. Many of them either beat their respective index or were in-line with far less risk, as most held more cash than the index or had portfolios with lower standard deviations and cheaper stocks in them. By way of example, American Century Equity Income was up 19.72% for the year versus its index at 14.81% and the S&P 500 at 11.96%. In a market that is at all-time highs, we applaud performance like American Century but more importantly we respect the fact that their 10 yr Beta is .66, Alpha is 1.86, Sharpe Ratio is 1.31. What do all of those Greek measures mean? It means that over a full market cycle when the market goes up and down, American Century Equity Income does better than the index because it goes down less than the market. Of course, when the market is eight years into a bull market and the average length is 4.3 yrs we are far more comfortable holding active managers rather than an index, in case Trump is not to able to deliver on his pro-business campaign promises or the Fed raises the Fed funds rates faster than the consensus expects.

Well another year is in the books and another quarterly letter has been wrapped up, so it is time to click our heels together and get back to the farm. Keeping with the Wizard of Oz motif, may your roads be golden, your cities covered in emeralds, and if you can’t get that, then at least have some laughs and reasons to smile. If you need any humorous subject matter, just turn on those same media pundits and wait for their next prediction (or punch line). In the meantime, we will sweat the details and try to keep the flying monkeys and wicked witches at bay. Please call with any questions.

General Compliance Disclosures

Statements made via this letter are the opinions of Creative Financial Group (“CFG”) and its advisors, and are not to be construed as guarantees, warranties or predictions of future events, portfolio allocations, portfolio results, investment returns, or other outcomes. None of the information contained is intended as a solicitation or offer to purchase or sell a specific security, mutual fund, bond, or any other investment. Readers should not assume that the considerations, suggestions, or recommendations will be profitable, suitable to their circumstances or that future investment and/or portfolio performance will be profitable or favorable. Past performance of indices, mutual funds, or actual portfolios does not guarantee future results. Future results may differ significantly from the past due to materially different economic and market conditions; investments in securities or other financial products involve risk and the possibility of loss, including a permanent loss of principal. Investments are not FDIC insured and have no bank guarantee.

Creative Financial Group (“CFG”) is a division of Synovus Securities, Inc (“SSI”), member FINRA/SIPC. Prior to

January 1, 2011, CFG was a separate registered investment adviser affiliate of SSI. Investment products and services are not FDIC insured, are not deposits of or other obligations of Synovus Bank, are not guaranteed by Synovus Bank and involve investment risk, including possible loss of principal amount invested. Synovus Securities, Inc. is a subsidiary of Synovus Financial Corp and an affiliate of Synovus Bank.

Investment products and services provided by Synovus are offered through Synovus Securities, Inc. (“SSI”), Synovus Trust Company, N.A. (“STC”), GLOBALT, a separately identifiable division of STC and Creative Financial Group, a division of SSI. Trust services for Synovus are provided by Synovus Trust Company, N.A. The registered broker-dealer offering brokerage products for Synovus is Synovus Securities, Inc., member FINRA/SIPC. Investment products and services are not FDIC insured, are not deposits of or other obligations of Synovus Bank, are not guaranteed by Synovus Bank and involve investment risk, including possible loss of principal amount invested.

Synovus Securities, Inc. is a subsidiary of Synovus Financial Corp and an affiliate of Synovus Bank and Synovus Trust.  Synovus Trust Company, N.A. is a subsidiary of Synovus Bank.

Pursuant to rules adopted by the U.S. Securities and Exchange Commission governing federally registered investment advisors, we request that you take time to compare your account balances and statements issued by National Financial Services, who acts as the custodian for your account(s).  We request you contact us immediately if you do not receive these statements or if the values reflected are materially different.

Cost basis reporting

If you buy and sell a security in a taxable account on or after the effective date, NFS will report cost basis for the sold security to you and the IRS on Form 1099-B. If you have a mix of covered and uncovered positions in the same security, NFS will report cost basis to you and the IRS for any covered position that is sold. NFS will apply the FIFO (First In, First Out) default method unless you inform us of a different method. Your cost basis method for all transactions must be final by settlement date. If you choose to change the default method, you can do so by notifying your Financial Consultant.

Use of Indexes

iThe investment return and style information and comparisons employ a variety of popular indices, and the index contents and strategies are the property of their respective companies (e.g., Dow Jones, Standard & Poor’s, Morningstar, Barclay Capital, Russell). Although the data is believed to be reliable, CFG makes no warranty with respect to the contents, accuracy, completeness, timeliness, suitability, or reliability of the information, which is represented here for informational use only and should not be considered investment advice or recommendation. None of the indices can be invested directly, and the return figures for these various securities indices are reported without management fees, trading costs, or other expenses subtracted from the returns, and are shown on a total return basis that assumes reinvestment of applicable capital gains and dividends. Components of indices may change over time. Small capitalization stocks are represented by the Russell 2000 Index. Mid Capitalization stocks are represented by the S&P Mid Cap 400 Index. Foreign stocks are represented by the MSCI EAFE Index and emerging markets are represented by the MSCI Emerging Markets Index.

 


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Creative Financial Group (“CFG”) is a division of Synovus Securities, Inc (“SSI”), member FINRA/SIPC. Prior to January 1, 2011, CFG was a separate registered investment adviser affiliate of SSI. Investment products and services are not FDIC insured, are not deposits of or other obligations of Synovus Bank, are not guaranteed by Synovus Bank and involve investment risk, including possible loss of principal amount invested. Synovus Securities, Inc. is a subsidiary of Synovus Financial Corp and an affiliate of Synovus Bank. You can obtain more information about Synovus Securities, Inc. and its Registered Representatives by accessing BrokerCheck